This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the top of any article.

Glut of Crude Shields Market From Price Shock

Oil prices are falling despite conflicts in Ukraine and the Middle East.

Fighting across Iraq, Libya, Ukraine and Gaza, and an accelerating economy, should mean higher oil prices. Yet crude is falling.

Six years ago, oil soared to a record $147 a barrel as tension mounted over Iran’s nuclear program and the world economy had just seen the strongest period of sustained growth since the 1970s. Now, West Texas Intermediate, the U.S. benchmark price, has traded below $100 for 10 days and Brent, the European equivalent, tumbled to a 13-month low.

What’s changed is the shale fracking boom. The U.S. is pumping the most oil in 27 years, adding more than 3 million barrels of daily supply since 2008. The International Energy Agency said yesterday that a supply glut is shielding the market from disruptions. Bank of America Corp., Citigroup Inc. and BNP Paribas SA concur.

“North America has pushed out an incredible amount of crude oil that it used to import,” Ed Morse, the head of commodities research at Citigroup, said in a phone interview from New York yesterday. “The world doesn’t need that much.”

The U.S. imported 7.17 million barrels a day of crude in May, a 26 percent drop from the same month in 2008, according to data compiled by the Energy Information Administration, the Energy Department’s statistical arm. Foreign deliveries will meet 22 percent of U.S. demand next year, the lowest level since 1970, the agency said yesterday.

U.S. gross domestic product will grow 3 percent in 2015, accelerating from 1.7 percent this year, according to the median forecast from 84 economists surveyed by Bloomberg. Job openings rose in June to the highest level in more than 13 years, firming up the labor market picture for the second half of the year, according to the U.S. government.

The nation’s output is forecast to climb to 9.28 million barrels a day next year, the highest level since 1972, the EIA said. The agency cut its 2014 price forecast for WTI to $100.45 a barrel yesterday from a July projection of $100.98.

Oil markets became more resilient to the threat of global supply disruptions because of “spare capacity” and softer global demand, Francisco Blanch, the head of commodities research at Bank of America in New York, said by phone yesterday. Saudi Arabia, the world’s largest crude exporter, has been very reactive to oil price moves resulting in markets that are the most stable since the early 1970s, the bank said in a report today.

“Growth in oil demand was far outpacing our ability to physically supply oil” in the first half of 2008, Harry Tchilinguirian, the head of commodity markets strategy at BNP Paribas in London, said by phone yesterday. “The price of oil needed to rise promptly to ration demand.”

Speculative Advance

The 2008 price rally was supported by investors pouring money into oil futures as they sought alternatives to stocks. Today, speculative interest in crude is shrinking, Tchilinguirian said. Net-long positions in both Brent and WTI fell to the lowest level in at least six months in the week ended Aug. 5, according to data compiled by the ICE Futures Europe exchange in London and the U.S. Commodity Futures Trading Commission.

“There was a bubble in the market in 2008,” with the view that the world was running out of oil and other commodities, Morse said. “Everything changed soon after 2009.”

Brent crude for September delivery fell as much as 0.6 percent today in London to $102.37 a barrel on the ICE exchange, the lowest price since July 2013. WTI oil declined 10 cents to $97.27 a barrel at 1:21 p.m. on the New York Mercantile Exchange.

Violence flared in Iraq, the second-largest producer in the Organization of Petroleum Exporting Countries, in early June as Sunni Islamist militants captured towns in the northwest and then pushed toward Baghdad. Clashes between political factions intensified last month in Libya, where oil exports have been choked by political protests.

Israel deployed forces in Gaza last month with the stated aims of quashing rocket fire and destroying dozens of infiltration tunnels. Tension between Russia and western governments has escalated over President Vladimir Putin’s backing of separatist rebels in eastern Ukraine.

Retail gasoline in the U.S. has dropped 22.3 cents a gallon since peaking in April at $3.696, data compiled by Heathrow, Florida-based AAA show. Prices are at a four-year seasonal low and capped the biggest July drop in six years as the nation’s refiners ran the most oil on record to take advantage of cheap domestic supplies.

Oil Demand

The recent decline in oil prices may prove to be just a phase as global demand is forecast to pick up in the second half of the year, Bhushan Bahree, senior director of global oil at IHS Energy, said by phone yesterday. Demand will rise 1.71 million barrels a day to 93.45 million in the third quarter and climb again to 94.04 million in the fourth, the Paris-based IEA said in a report yesterday.

“There are different moving parts when you go forward, and what we’re expecting now may not play out the same way,” Bahree said from Washington. “I would still think we are going to see more demand and there will be some support for prices.”

Global oil demand grew last quarter at the weakest pace since 2012, helping to calm world markets amid the conflicts, the IEA said in its report. The agency cut estimates for total growth in 2014 by 180,000 barrels a day.

Supplies from the Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world’s oil, rose to a five-month high of 30.44 million barrels a day in July as Libyan output recovered and Saudi Arabia increased production, the IEA said.

Industry oil inventories in developed nations swelled in June to their highest since September, the agency said. Stockpiles of crude and refined products in the Organization for Economic Cooperation and Development increased for a sixth month in June, by 13.8 million barrels to 2.67 billion, narrowing their deficit to their five-year average.

“Market participants are obviously fed up with events that are built up as geopolitical risks, but which never realize as material disruptions in supply,” Eugen Weinberg, the head of commodities research at Commerzbank AG in Frankfurt, said by e-mail yesterday. “At the same time the demand growth has been rather disappointing.”

Libyan Oil

Libya loaded the first oil cargo from the port of Ras Lanuf since it was closed by rebels a year ago. The tanker will soon leave port with 680,000 barrels of crude and head to Italy, Ibrahim Al-Awami, the oil ministry’s director of measurement, said by phone yesterday from Tripoli. State-run National Oil Corp. plans to double exports this month.

U.S. oil production is outpacing unplanned outages that cut into global supply, Adam Sieminski, the EIA’s administrator, said by phone from Washington. Global outages affected about 3.2 million barrels a day in July, up from 1.5 million at the end of 2011, he said. U.S. output has meanwhile risen 2.61 million barrels a day since the end of 2011.

“Production is continuing to grow, and in the meantime, global demand is slowing down a little bit and efficiency gains are beginning to have an impact,” Sieminski said. “It’s a very positive story for consumers.”

Treasury & Risk

Treasury & Risk is an online publication and robust website designed to meet the information needs of finance, treasury, and risk management professionals. Our editorial content, delivered through multiple interactive channels, mixes strategic insights from thought leaders with in-depth analysis of best practices, original research projects, and case studies with corporate innovators.